The UK insurance sector uses a variety of distribution methods to reach customers. Appointed representatives (ARs) are used by insurers and intermediaries to liaise with prospects and customers.

Accountability for these ARs falls to the authorised insurers and intermediaries (known as ‘principals’), who take regulatory responsibility for the ARs’ actions.

The FCA carried out its review to examine the impact of the AR structure on customers. It wanted to explore whether the risk of using ARs had been accurately assessed by the principal firms, and whether the ARs’ activities – particularly sales activities – were subject to sufficient systems and controls.

What types of firms were covered by the review?

The review focused on general insurance products and services sold to UK retail and SME customers. 190 principals, with a network of ARs, were surveyed in the first stage of the review. Products sold by these ARS included home, motor, travel, guaranteed asset protection (GAP) and warranty insurance, as well as products for the SME sector.

More detailed research followed among 15 of these principal firms. A further 14 principals and 25 of their ARs were subject to an even more in-depth process, which included meetings and interviews with senior management and staff, and reviews of policies, procedures, documentation and customer files. The assessors also listened in on sales calls.

What did the review find?

The FCA identified ‘significant shortcomings in relation to principal firms’ understanding of their regulatory obligations for their appointed representatives and their control and oversight of their appointed representatives’ activities’.

Over half of the 15 principal firms in the sample could not consistently demonstrate effective risk management and control frameworks to identify and manage the risks arising from their ARs’ activities.

At a third of the firms reviewed, the regulator found ‘examples of potential mis-selling and customer detriment’. Many of these had gone unnoticed by the principals.

What happens next?

The FCA has intervened directly with five of the firms it assessed, and drawn up plans of action for improvement.

The regulator has also issued a ‘Dear CEO’ letter to the chief executives of principal firms with appointed representatives in the sector. The letter highlights the report’s concerns and sets out expectations.

Report has lessons for all firms delegating or outsourcing work

The areas covered by the report have relevance for all regulated firms, not just those that use appointed representatives.

In the findings of the FCA thematic review, the regulator has again demonstrated its emphasis on the fair treatment of customers, and the need to avoid potential mis-selling.

The theme of accountability is also one the FCA returns to time and again: this blog on compliant outsourcing looks in more detail at how firms can outsource to experts while remaining confident that governance requirements are being met.

This has strong parallels with the regulator’s ARs recommendations – it’s vital that firms take responsibility for the actions of any firm they appoint to act on their behalf, particularly when this involves communications with customers. Making sure your Financial Promotions treat customers fairly, that marketing materials have been through the necessary approvals process; and that your record-keeping is up to scratch is the responsibility of the regulated firm, even if the tasks are outsourced to unregulated suppliers.

Making sure that an ethical ethos sits at the heart of your approach to business is essential. Whether you are directly controlling your work or delegating to others, a culture where good governance is entrenched puts you strides ahead when it comes to meeting regulatory demands.